An annual survey from the American Chamber of Commerce in China released last month showed that more than 80 percent of its members felt less welcome in China than before and most had little confidence in China’s vows to open its markets.

Since late last year, authorities have also been tightening restrictions on capital outflows, reining in what officials have called “irrational” outbound investment.

The curbs probably explained a fall in outbound direct investment, which plummeted 35.7 percent in January to 53.27 billion yuan, the weakest in over a year.

Gao added that consumption will continue to grow rapidly this year, while the foreign trade environment will remain complex.

Cooperation is the only option for the U.S.-China trade relations as a healthy relationship is beneficial for both sides, he said.

Although there have been disagreements between the two countries in the past, they were solved through negotiation, Gao added.

ALSO IN BUSINESS NEWS

Tensions between China and the United States have heightened since the start of the year after U.S. President Donald Trump criticized Beijing for harming American companies and consumers by devaluing its yuan currency.

Throughout his election campaign, Trump threatened to levy punitive tariffs against China in order to bring down the U.S. trade deficit, keeping global markets on edge.

Lack of clarity about President Donald Trump’s economic policies adding to the uncertainties facing the mainland economy, according to observers

By Wendy Wu
South China Morning Post

PUBLISHED : Monday, 20 February, 2017, 12:26pm

UPDATED : Monday, 20 February, 2017, 12:26pm

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Economic and financial movements in the US were the biggest uncertainty globally given the lack of details about President Trump’s economic policies.

A file picture of a worker at a car factory in Wuhan in Hubei province. Photo: AFP

China’s economic growth looks stronger so far this year, but the country still faces financial risks and uncertainties created by the lack of clarity over the policies to be pursued by Donald Trump’s administration in Washington, Chinese economists said.

The world’s second-largest economy is likely to grow by seven per cent in the first quarter due to a recovery in manufacturing and exports, said Liang Hong, chief economist at China International Capital Corporation, a leading brokerage firm in the mainland. That compares with growth of 6.8 per cent posted in the final quarter of last year.

Without black swan events such as “a cliff fall in external demand” or a rapid rise in real interest rates in China, the nation’s economic recovery will continue, Liang told a forum held by the National School of Development at Peking University on Sunday.

However, the risk of capital flowing out of the country will persist as the US Federal Reserve is likely to continue to raise interest rates, said Guan Tao, a former senior official at the State Administration of Foreign Exchange.

This is forcing China’s central bank to walk a fine line between monetary easing and tightening.

The People’s Bank of China has refrained from lowering the amount banks must hold in reserves or cutting interest rates for almost a year for fear of fuelling asset bubbles and weakening the strength of the country’s currency.

People’s Bank of China

The People’s Bank of China said in a quarterly monetary policy report published on Friday that it would focus more on managing financial risks as the downward pressure on economic growth “has lessened”.

However, the central bank will still need to cut banks’ reserve ratios to release cash into the economy, according to George Wu, a former monetary policy official at the central bank and now chief economist at Huarong Securities.

“The technique and timing [for the central bank] to adjust is very important,” he said, pointing out that China’s deposit reserve ratio remains one of the highest among the major economies.

“Within all levels inside the government, there is a lack of lack consensus on many issues: whether financial risk is the biggest risk, whether supervision is problematic, whether these are the responsibilities of the central bank and financial regulators,” said Wu.

Part of the reason was that there are many uncertainties beyond Beijing’s control, one economist said.

Zhu Min, former deputy director of the International Monetary Fund, said economic and financial movements in the US were the biggest uncertainty globally given the lack of details about President Trump’s economic policies.

But Trump’s pledge to cut taxes, if pursued, would add fuel to Chinese enterprises investing in the US, said Zhu, who is the director of the National Institute of Financial Research at Tsinghua University in Beijing.

He said political factors would affect US economic policy decisions and rising protectionism and the backlash against globalisation around the world risks creating further political instability.

“We will see greater volatility in financial markets this year,” he said.

The country’s debt is rising dramatically, while growth in gross domestic product is slowing

Getty Images

The People’s Bank of China in Beijing.

By IVAN MARTCHEV
Market Watch

It came not with a bang but a whimper.

The January data from China finally confirmed that the country’s foreign-exchange reserves fell by $12.3 billion to $2.998 trillion, which compares with the all-time high of $3.993 trillion in June 2014 (see chart).

What the official reserve data do not show is that massive borrowings outside China have accumulated over the past 15 years, bringing net reserves down to about $1.7 trillion, according to statistics prepared by Kynikos Associates.

That much smaller reserve amount is not necessarily large enough to support the yuan exchange rate, particularly if foreign-exchange outflows accelerate again as the Chinese credit bubble has now burst, in my opinion.

An acceleration in borrowing with a slowing economy is the classic definition of a burst credit bubble.

Ivan Martchev

China has a total debt-to-GDP ratio of close to 400%, if one includes the infamous unregulated shadow banking system that is habitually omitted from official statistics. In 2000, China’s total debt-to-GDP ratio stood near 100%. As Chinese GDP grew from $1.094 trillion at the end of the 20th century to $11.75 trillion at the end of 2016, the country’s total leverage ratio ballooned. China’s economy grew 11-fold, and total credit in the financial system surged by over 40-fold.

As the Chinese economy slows (see chart), the level of borrowing is accelerating, as can be seen here in China’s “total social financing” data.

This credit metric includes off-balance sheet financing outside the conventional bank lending system, such as initial public offerings, loans from trust companies and bond sales. If Chinese GDP continues to slow (and there are many observers, myself included, that do not believe the official 2016 GDP growth rate of 6.7%), and total credit in the economy continues to surge, then the Chinese economy will in effect be running as fast as it can just to stand still. An acceleration in borrowing with a slowing economy is the classic definition of a burst credit bubble.

Partially inaccurate statistics

What was most surprising in 2016 is how orderly the situation in China was. There is also evidence of a slight uptick in economic activity, if one looks at the official statistics. But I don’t believe it to be fully accurate, because the Chinese have a history of “smoothing out” their official economic statistics. For example, their 34% devaluation of the yuan in December 1993 was aimed to help China deal with a recession that was never officially acknowledged. Evidence of the recession only showed up in secondary loan-loss data and other “undoctored” metrics.

I am surprised at the current calm in China, as credit bubbles tend to pick up speed and get rather disorderly when they begin to unravel. I don’t know if this unraveling will come in 2017 or later, but I am watching the official forex reserve data for evidence of accelerating outflows, which would be one sign that the unraveling is picking up steam.

Trump to accelerate China’s woes

On top of China’s own epic credit bubble, we have a phenomenon called Donald J. Trump, who has made it a priority to rebalance the U.S. trade deficit. While I fully support the president in his quest, he appears to point the finger at both China and Mexico in the same fashion. However, the Mexican situation is very different from the one with China, where the trade imbalance is running out of control.

In 2016, as this table shows, the Chinese bought $115.775 billion of U.S. goods and services, while the U.S. bought $462.813 billion worth of Chinese goods and services, which makes for a gargantuan $347 billion trade imbalance and accounts for the lion’s share of the total U.S. trade deficit (see chart).

To be fair to Trump, the Chinese have been running a persistent trade surplus with the rest of the world over the past 10 years (see chart), but that surplus has been getting bigger because exports to China are slowing with the decline in Chinese GDP growth.

Trade as a political tool

More importantly, the Chinese have been using trade as a political tool as they habitually run bilateral trade deficits with many of their Asian trade partners to increase their political influence in the region. Such trade strategies are unlikely to influence the Trump administration, which is hell-bent on rebalancing the U.S.-China trade imbalance.

Trump’s clash with China on the trade issue comes at precisely the wrong time for the Chinese as their epic credit bubble is unraveling. While trade frictions and financial issues in China are unrelated events, Trump’s election is like kerosene thrown on an already burning economic fire in China. What I foresee happening here is similar to the Asian crisis in 1997-1998, this time emanating from China, with the caveat that today’s Chinese GDP is much bigger than total Asian GDP in 1997.

To those who may suggest I am merely making observations and not predictions, please see my January 23, 2015, MarketWatch article, “Why 2015 could be rough for China,” which I wrote before the bulk of China’s $1 trillion foreign-exchange outflow materialized. I am not sure if 2017 will be the year when the wheels come off the wagon in China, but I have seen increasing evidence of my credit-bubble theory coming to fruition and the economic repercussions likely to follow.

Ivan Martchev is an investment specialist with institutional money manager Navellier and Associates. The opinions expressed are his own.

HONG KONG—U.S. President Donald Trump’s accusations of currency manipulation appear to be reaching an audience he may not have primarily intended.

Mr. Trump vowed on the campaign trail to revive American manufacturing, in part by taking a hard line on Chinese trade practices and labeling the country a currency manipulator. Since taking office, the president has accused both China and Japan of consistently devaluing their currencies,…

Still, some smaller economies look like they are taking notice, notably Taiwan and Switzerland. The U.S. Treasury found in October that both had engaged in persistent, one-way currency intervention, essentially by buying foreign currencies like the U.S. dollar and selling their own to maintain weak exchange rates.

Analysts say the central banks of Switzerland and Taiwan are now stepping back from those activities, perhaps to avoid closer scrutiny from the Trump administration. The upshot: The Swiss franc has advanced nearly 2% against the U.S. dollar this year, while the new Taiwan dollar has surged 5.3%. Both have outperformed the euro and yen since the U.S. election in early November.

Taiwan’s central bank bought $500 million in foreign currencies in the fourth quarter, well below its quarterly average of more than $3 billion since 2012, according to Khoon Goh , head of Asia research at ANZ in Singapore, who said he suspects it is stepping back from “currency-smoothing operations.” The central bank said it doesn’t comment on currency policy.

For the first nine months of last year, the Swiss National Bank /quotes/zigman/1379668/delayedCH:SNBN+0.12%intervened heavily in currency markets to slow the franc’s rise, spending an amount roughly equivalent to its current-account surplus for the period, J.P. Morgan/quotes/zigman/272085/compositeJPM-0.76%analysts note. Over the following four months, the scale dropped to around two-thirds of the surplus.

“It’s not an entirely fanciful suggestion that the SNB might be tapering intervention in order to the guard against the risk of being cited by the U.S. Treasury as a currency manipulator,” the analysts wrote in a note.

The Swiss National Bank declined to comment.

For the U.S. to label an economy a currency manipulator under the current law, it must have a large trade surplus with the U.S. and a hefty current-account surplus and persistently intervene in the currency in one direction. As of October, no economies met all three criteria.

Recent comments from officials in South Korea, which the Treasury has flagged for its hefty trade surplus with the U.S. and its current-account surplus, suggest they’re similarly eager to avoid U.S. ire, says Govinda Finn , senior analyst at Standard Life Investments in Edinburgh. The Korean won has surged 5.2% against the dollar this year.

But any gains in the Korean and Taiwanese currencies due to U.S. political pressure may not last, he said: “On a longer-term horizon, there’s a pretty strong case to say both of those currencies can and will weaken as the authorities look to support their economies.”

November’s drop was the largest monthly fall since January. Photo: AFP

The fall in China’s foreign ­exchange reserves accelerated in November even though Beijing is gradually closing the door on ­capital outflows.

The larger-than-expected decline in the world’s biggest stockpile of foreign exchange exposed the flaws in Beijing’s current ­approach of selling state reserves to support the yuan and was very likely to force the authorities to take a stricter line on outbound investment and payments, analysts said.

The reserves shrank by US$69.1 billion last month to US$3.052 trillion, according to data released by the People’s Bank of China on Wednesday. The mainland has lost nearly US$1 trillion worth of reserves since the figure peaked in June 2014.

November’s drop, the largest monthly fall since January, came as the US dollar index hit a 13-year high following Donald Trump’s victory in the US presidential ­election.

Tim Condon, chief Asia economist at ING in Singapore, said the rapid fall was undermining the Chinese government’s plan of a gradual and orderly decline.

“The authorities will respond by tightening capital controls and stabilising the daily midpoint, which they have done in past episodes of market turbulence,” Condon said.

In a joint statement released on Tuesday, the central bank and the National Development and Reform Commission, the state’s economic planning agency, warned of “irrational investment” in foreign properties, hotels, cinemas, entertainment and soccer clubs.

Documents obtained earlier by the South China Morning Post show capital outflow controls are already in force involving forex clearance for outbound investment of more than US$5 million, plus stricter reviews in place over very large deals. Both outbound investment and these mega deals are set to limit the speed and size of capital flow.

The fall in the value of the yuan, the reduction in foreign exchange reserves and the government measures to control outbound investment have all come at once.

They have dealt a blow to Beijing’s ambitions to make the yuan an international reserve currency along with the US dollar, the euro, the British pound and the Japanese yen, which together comprise the special drawing rights basket of the International Monetary Fund.

Beijing’s efforts to calm market concerns about the yuan’s value, or breaking the one-way bet on the yuan’s depreciation, have so far achieved only limited success, if any at all.

This article appeared in the South China Morning Post print edition as:

LONDON (AFP) – London has ramped up its foreign exchange reserves in a move described by British media on Monday as a war chest against market chaos should Britain leave the European Union.Currency reserves jumped 34 percent to $98.2 billion (87.9 billion euros) in January 2016, from $73.4 billion for the same month a year earlier, according to recent data from the Bank of England (BoE) — which manages the Treasury’s foreign exchange funds.

The nation’s emergency “war chest” has been ramped up to guard against a “disorderly collapse” in the pound and equity markets if Britons vote in a key referendum expected later this year to leave the European Union, The Times newspaper said on Monday.

The reserves are mostly held in dollars.

However, both the BoE and the government declined to comment on why the currency reserves have risen so rapidly over the past year.

“We do not entirely know what the government intentions are,” said Scott Corfe, economist at the Centre for Economics and Business Research.

“But that certainly can be one explanation — accumulating currency reserves as a precaution — because there would be some volatility in the event of Brexit,” Corfe told AFP.

Bank of England. Photo: Getty Images

Economists warn that the pound could potentially collapse by 20 percent in value, in the event of a British exit.

“Faced with a Brexit, we would expect the authorities to welcome a weaker pound,” said David Owen, chief European economist at Jefferies.

A weaker British currency would likely boost the nation’s exporters because it makes their goods cheaper for international buyers using stronger currencies.

“The key thing here is see a managed depreciation of sterling — with the (Treasury) still able to successfully issue gilts, rather than something more of a rout,” Owen warned.

Support for Britain leaving the EU has risen since Prime Minister David Cameron unveiled plans for a deal to keep the country in the bloc, a poll showed Friday.

The survey showed 45 percent now wanted to leave the EU, ahead of 36 percent who wanted Britain to remain in the 28-member club.

That marked a three point rise for those in favour of a so-called “Brexit” since a poll taken a week earlier.

Cameron has set a deadline of the end of 2017 to hold a referendum on whether Britain should stay in the EU, but sources say he is keen to push a vote through by June.

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China FX reserves drop to 4-year low

Squawk Box Live tracked global market moves after China reported a $99.5 billion drop in foreign currency reserves in January to $3.23 trillion, marking the lowest level since 2012.

Markets in Hong Kong and mainland China, as well as Singapore, Taiwan, South Korea and others, were closed for the Lunar New Year holiday.